Ridgewood Estate Planning Blog

On behalf of Michael A. Manna & Associates posted in Trusts on Thursday, November 3, 2016.

For many people, inheritance taxes can impose a substantial burden during a time of grief where there is enough stress and change to navigate already. They can seriously impact one's ability to ensure that one's heirs and beneficiaries are well provided for, and they also create financial planning hurdles that often need to be overcome. While creative solutions like moving across state lines to avoid inheritance taxes have become increasingly popular, family trusts are often more secure, more predictable, and easier to manage in the long run.

Last month the Treasury Department proposed rules that could dramatically impact estate tax planning. Specifically, the Treasury Department is planning to limit, or even eliminate, the use of "valuation discounts" for closely-held companies, LLCs and other assets. The Treasury Department issued these proposals in August. On December 1, 2016, there will be a public hearing to discuss the merits of this proposal. It is possible the Treasury Department will formalize changes to these rules before the end of 2016.

What are valuation discounts?

Valuation discounts allow individuals or businesses to divide interests in an asset, thereby reducing its value. For instance, if a business owner divides a family-owned business into three equal parts and gives a part to each child, the value of each piece is less, often much less, than the value of the whole business, since a portion of the business is likely to hold little value. By using valuation discounts, assets that could have faced the estate tax as a whole would not be subject to the estate tax in parts.

Valuation discounts can apply to nonbusiness assets as well. Commonly, the owner of the assets will distribute assets to a holding company or a charity. Owners of the assets could then hold onto their part of the asset until the statute of limitations for an audit has passed, and then sell the assets at full market value.

When children are growing up, their parents play a critical role in their development. When parents are growing old, adult children are likely to play a crucial role in caring for their parents. This reversal of roles can be challenging, and will only be successful when both parties understand their roles and have similar expectations. According to Fidelity Investment's Family & Finance report, parents and children don't always see eye-to-eye in these matters. This survey asked parents and children questions about financial support, estate planning, retirement income, elder care and other issues. It found that 40% of families are not in agreement about these important issues.

These misunderstandings were striking in many cases.

Roughly three in four parents assume that one child would care for the parents. However, 40% of the children who parents believed to take on the primary caregiver role were unaware of this fact.

More than one out of four (27%) of adult children do not know if they will be the executor of their parent's estate.

The unexpected death of musician Prince stunned people across the United States and the world. Having sold more than one hundred million albums over his career and having completed many successful concert tours, Prince amassed a fortune estimated at many hundreds of millions of dollars. Considering the size of his estate, the fact that Prince died without a will or trust was surprising to many estate planning professionals.

Had Prince died with a valid will or trust in place, his assets and property would have been transferred in an orderly fashion to the manner he intended. Instead, multiple individuals have made claims against the late musician's estate. Among these individuals are Prince's sister, Tyka Nelson and six half-siblings. Moreover, other individuals have made claims against his estate as well. For instance, a federal inmate in Colorado claims that he is Prince's son. If true, this man would stand to inherit Prince's entire fortune. However Prince's estate is eventually resolved, there is no question that with a will or trust, the process would be easier, faster and relatively free of drama.

New Jersey is one of the only states to have both an estate tax and inheritance tax. Currently, New Jersey has an estate tax rate of up to 16% on assets more than $675,000. Furthermore, New Jersey has an inheritance tax of 16% that applies to people other than spouses, children and parents. These taxes are in addition to the federal estate tax.

At least some New Jersey residents consider relocating due to estate planning considerations. Of note, New Jersey's wealthiest resident has relocated to Florida. David Tepper, a hedge fund manager worth approximately $10.6 billion, moved to Florida in October of 2015. Florida does not have an estate tax, nor does it have a state income tax. According to people familiar with Mr. Tepper, tax considerations were one factor for the move although not the only factor.

One of the biggest concerns many people have about growing older is spending the assets they earned over a lifetime to pay for nursing home care. The cost of nursing home care is astronomical. According to the New Jersey Department of Human Services, the average daily cost of nursing home care was approximately $330 a day in 2015. These costs can drain decades' worth of savings in a relatively short period of time.

Medicaid covers these costs for individuals who qualify. The problem is that in order to qualify for Medicaid, you must prove that you have limited income and assets. Thankfully, there are many effective strategies to qualify for Medicaid without first spending down all of your assets. On December 1, 2014, the federal government authorized the use of Qualified Income Trusts (QITs) in New Jersey. These instruments have proven to be an effective estate planning tool for many families.

Many New Jersey residents often consider their pets as part of the family. Therefore, they may be concerned about the welfare of those pets in the event that the owners suffer from a situation in which they are not able to properly care for their pets. In some cases, that issue could be due to illness or incapacitation or potentially due to the owner's demise. If individuals are concerned about pet care, they may wish to consider addressing the matter during estate planning.

If incapacitation occurs, parties are often unable to care for themselves let alone their pets. Therefore, individuals may wish to ensure that they have appointed caretakers for their pets. Additionally, if a durable power of attorney has been appointed, a pet owner will likely want to make sure that the appointed individual has to ability to use funds to take care of pet-related expenses.

For New Jersey residents who want to ensure that their families understand their end-of-life wishes, estate planning is an action to consider. By creating an estate plan, individuals can detail what actions should take place in the event of their incapacitation, who should receive what assets after death and other similar topics. Though estate planning can prove beneficial in the future, many individuals put off creating their plans.

It was recently reported that 40 percent of individuals in the Baby Boomer generation do not have a will. Furthermore, when individuals over the age of 34 are considered, that number increases to 71 percent. Many parties may not follow through with their planning because they feel they have ample time to get around to it, but an unexpected accident or illness could occur at any time.

Many New Jersey families are interested in ways to reduce their estate tax obligation. While there are a number of ways to reach that goal, some are more creative than others and can benefit multiple members of the same extended family. An example lies in a practice known as upstream gifting, which can have capital gains and estate tax planning benefits for three generations or more within the same family.

Capital gains tax comes into play when a property is sold. The original purchase price is known as the cost basis and is adjusted considering aspects such as real estate appreciation/depreciation. The difference between the cost basis and the sales price of the property is the amount that is subject to capital gains tax. A higher basis means a lower tax obligation.

One of the primary purposes of an estate plan is to create a body of documents and vehicles to smoothly transfer wealth from one party to others after death. The concept is a simple one, but the construction of an estate planning package can be complex. One of the first and foremost matters that must be handled by New Jersey clients involves selecting one's beneficiaries.

Choosing who will inherit one's wealth can be a difficult decision. For parents, the matter is rarely cut-and-dried. Some parents wish that their wealth be divided evenly between all of their surviving children. Even this approach involves complex decision-making, however, as not all assets hold the same type and volume of wealth. For example, a piece of real estate is valued quite differently than a life insurance policy, and is far less liquid an asset; in order to maintain parity, it is necessary to think about which blend of assets most closely meet that goal.

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